Forecast has Office, Vista going in opposite directions

In Microsoft's fiscal first quarter of 2009, Vista sales grew sluggishly at 2 percent, while Office piles up 20 percent growth for its division
  • Eric Lai (Computerworld)
  • 27 October, 2008 08:42

Microsoft's quarterly call with Wall Street on Thursday told the tale of two software franchises and their diverging financial fortunes.

Microsoft's Client revenue, which virtually all comes from sales of Windows Vista, grew just 2 percent year-over-year to US$4.22 billion in its fiscal first quarter of 2009.

"That fell pretty far short of Microsoft's expectations," said Matt Rosoff, an analyst with the independent research firm Directions on Microsoft. "That's always a worry, since it's the core of the company's business."

This was the second recent quarter out of three that saw Vista sales grow sluggishly or shrink. In Microsoft's third quarter of 2008, Client revenue fell 24 percent year-over-year , although sales grew 13 percent year-over-year in the intervening fourth quarter.

Vista's weak growth was in spite of 10 percent to 12 percent growth in PC shipments. Microsoft blamed the sluggishness on flat PC sales in developed countries and zooming sales of low-cost PCs, in particular, NetBooks. Customers in developing countries are more likely to buy PCs with cheaper, basic versions of Windows Vista installed. Or, if they buy NetBooks, they are likely to get Windows XP Home or Linux, which results in little or no revenue to the software maker.

As a result, sales to PC manufacturers, which supply 80 percent of Vista's sales, actually fell 1 percent (The rest of Vista revenue comes from volume licenses to big companies and retail purchases by consumers and small businesses).

Microsoft hopes Vista can rebound in the second quarter with 7 percent to 10 percent growth during the traditionally strong holiday season.

"We think, particularly with Christmas coming up, that overall sales will be relatively good," said Microsoft CFO Chris Liddell during the earnings call. "We have reasonably good visibility into this quarter in terms of the inventory positions. We feel pretty good about some of the initiatives that we have in the unlicensed area. We've got channel inventory down to where we would like to see it."

But Rosoff said he is "surprised they are that optimistic for the holiday quarter."

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Other bellwether PC vendors also lack Microsoft's confidence. Chip maker Intel expressed an uncertain outlook during its earnings call earlier this month. While Phoenix Technologies, which supplies BIOS software to half of PCs, on Thursday cut its forecast for laptop sales growth in half to 15 percent from 30 percent.

Microsoft admits the picture for Vista sales is bleaker for the rest of the year. It expects sales to increase just 2 percent, meaning that revenue in the last two quarters of the year might actually fall slightly from the prior year.

That is despite Microsoft's own forecast that PC shipments would grow from 8 percent to 12 percent for the year. The reason, again, is the expectation that Vista sales will be flat in developed countries and that non-Vista-using NetBooks will drive PC unit growth.

Office 2007 enjoys strong growth

Office 2007, meanwhile, appeared to continue its unbroken string of stellar growth. Revenue in the Microsoft Business Division grew 20 percent year-over-year to US$4.95 billion.

The company doesn't break out the percentage of MBD revenue that comes from Office. Microsoft has added several highly profitable products to MBD in recent years, most significantly, Exchange Server, which Rosoff estimates is almost a US$2 billion annual business.

Still, Office undoubtedly comprises the majority of MBD's revenues, Rosoff said. Those revenues are expected to grow 7 percent to 8 percent in the next quarter, and 12 percent to 13 percent for the entire year, far higher than Client (Vista's) revenues.

Microsoft Office has beaten back many threats during its long era of domination. But with the advent of credible SaaS competitors such as Google Docs, cheaper desktop competitors such as IBM Symphony or the much-improved, free OpenOffice 3.0, and the weak economy, could Office's grip on 550 million users finally be weakening? Rosoff isn't buying it.

"I've heard this argument many times over the years. But Office continues to have a real stranglehold in the corporation," Rosoff said. "In the absence of evidence to the contrary, I think it's going to stay that way."